2023 Employee Retention Tax Credit

COVID-19 has caused hardships and unprecedented challenges for businesses and organizations all over the world. Many employers have faced reduced revenues, increased expenses, and disrupted operations due to lockdowns, social distancing, and health and safety measures.

Employee Retention Credit is a refundable income tax credit available to eligible employers that helps them retain their employees while providing health benefits.

The ERC has been in place since 2020 when the CARES Act was passed. Later, in 2021 and again in 2023, it was modified and extended by new legislation. The ERC will be explained in this article, along with how it works and the different eligibility criteria and time periods for which it can be claimed.

For a brief reading of what the Employee Retention Credit or ERC is, take a look at this video from the YouTube channel “ERC Specialists”. You can also continue below to read an in-depth explanation of ERC.

What is the Employee Retention Credit? 2023 Employee Retention Tax Credit

Employee Retention Credit (ERC) is a refundable credit available to tax-exempt and for-profit organizations and businesses that have employees who were affected by COVID-19. The ERC is a refundable tax credit that was created by 2020’s CARES Act and has been extended and changed by subsequent legislations of 2021 and 2023. The ERC is designed to encourage employers to retain their employees and offer them health benefits in times of crisis.

Main Features and Benefits

Credits are equal to a percent of the qualified wages and costs for health insurance paid to eligible employees up to a limit per employee each quarter.
The percentage and the limit vary depending on the time period for which the credit is claimed. For 2020, the percentage is 50%, and the limit is $5,000 per employee for the entire year. For 2021, it is 70%. The limit is $7,000 per quarter per employee. For 2023, there is a 70% percentage for the first 2 quarters followed by 40% for the second two quarters. There is a $10,000 limit per employee. 2023 Employee Retention Tax Credit
The credit is fully refundable, which means that if it exceeds the employer’s payroll tax liability the excess amount will be returned to the employer.
Employers who have experienced a significant drop in gross receipts or a complete or partial suspension of their operations as a result of a government order relating to COVID-19 can claim the credit. For 2023 only, employers that are classified as recovery startup business can claim the credit.
Credits may be obtained by filing a revised employment tax form (Form 941X) or reducing employment deposit amounts in anticipation. The credit can be requested in advance by employers using Form 7200.

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Eligibility Criteria

Employers who wish to qualify for Employee Retention Credit (ERC) must meet two main criteria.

The employer’s business or organization was fully or partially suspended by a government order due to COVID-19 during a calendar quarter in 2020 or 2021
The employer’s gross receipts for a calendar quarter in 2020 or 2021 were less than 50% (for 2020) or 80% (for 2021) of its gross receipts for the same quarter in 2019

In addition, there is a special rule for recovery startup businesses that began operations after February 15, 2020 and have average annual gross receipts of no more than $1 million. These businesses can be eligible for ERC regardless of their revenue decline or suspension.

Business Suspension

A government order can either suspend or fully suspend a company or organization if the following conditions are met:

The order restricts commerce, travel or group meetings because of COVID-19
The order will affect the operation of the business or the organization
The order will apply to any calendar month in 2020 or even 2021

These are some examples:

Stay-at-home orders prohibiting the operation of non-essential businesses
Certain businesses have curfews that limit their hours of operations
Limits on the capacity of a business that limit how many customers or clients it can serve
Travel restrictions or travel bans that limit the ability of businesses to transport products or services

To determine whether an employer’s business was suspended fully or partially by a government directive, the employer must:

The nature and extent of the order, and its impact on the operation of your business
The length and frequency of your order and the way it corresponds to the calendar quarters
The extent and severity of the impact of the order on the revenues and expenses of the business

Revenue Decline

It is considered that a business or organization has experienced a significant drop in gross receipts when:

The gross receipts for any calendar quarter in 2020 were less than 50% of its gross receipts for the same quarter in 2019
The gross revenue for any quarter of 2021 was less than 80% that for the same period in 2019.

Gross receipts refer to the total of all money received or accrued during a company’s annual accounting period. Gross receipts consist of:

Sales of Goods & Services
Dividends (rents), royalties and interest
Contributions are gifts, donations and grants 2023 Employee Retention Tax Credit
Membership fees and dues
Gross profits from trades and businesses

To compare gross revenues for different quarters an employer can use:

The same method of accounting (cash or accrual) that it used to file its federal income tax return for 2019
Use the same calendar quarters as it did for its federal employment tax return (Form 941 ) for 2019 and 2021/2022
It is the same income sources that were reported on the federal income tax returns for 2019.

Recovery Startup Business

A startup that is in recovery can be defined as

Begun carrying on any business after February 15th, 2020
Has average annual gross receipts of no more than $1 million for the three-tax-year period ending with the tax year that precedes the calendar quarter for which the credit is determined

Even if it does not meet the criteria for revenue decline or suspension of business, a recovery startup can still qualify. Recovery startup businesses are subject to certain restrictions and special rules.

Maximum credit per quarter: $50,000
The credit is only available for wages paid in the third and fourth quarters of 2021
All recovery startup businesses are subject to an aggregate cap of $250,000,000.

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Credit Amounts Calculation

ERCs have different rules and amounts depending on the length of time and type of employer. The ERC’s main influences are:

How much the employer’s business was affected by the pandemic, either by having to close or reduce operations due to government orders or by having a big drop in income compared to 2019
Employer’s number of employees in 2019 or 2021, and whether the employee worked or not.
The amount of money paid by the employer to each employee as well as their health insurance during pandemic

In order to receive the ERC from the IRS, the employer will need to complete some forms. The employer must provide proof of how much they paid their employees for health insurance as well as the ERC. The IRS will examine the forms to determine if the employer is eligible and then pay him the money. The employer can use the money to pay their employees and their health insurance or to get refunds or credits for their payroll taxes.

The ERC will no longer be available. The ERC began in March 2020, and it will end in September 2022. The employer must claim the ERC prior to its expiration or becoming unavailable. The employer should also make sure to not waste the money. 2023 Employee Retention Tax Credit

You can find more information below on ERC calculation and credit amount.

Time Period

The ERC has been introduced, modified, and terminated in different laws between 2020 and 2021. The credit amount depends on the period for which you claim it. The table below summarises key features and differences for the ERC in each time frame:

Time Period	Law	Eligible Employers	Credit Rate	Qualified Wages
2020	CARES Act	Employers with business suspension or revenue decline of more than 50%	50% of qualified wages up to $10,000 per employee per year	Wages paid from March 13 to December 31, 2020
Q1-Q3 2021	CAA and ARPA	Employers with business suspension or revenue decline of more than 20%	70% of qualified wages up to $10,000 per employee per quarter	Wages paid from January 1 to September 30, 2021
Q3-Q4 2021 (Recovery Startup Business)	ARPA	Recovery startup businesses with average annual gross receipts of no more than $1 million,	70% of qualified wages up to $10,000 per employee per quarter (subject to a $50,000 cap per quarter),	Wages paid from July 1 to December 31, 2021,
Q4 2021 – Q3 2022 (Severely Financially Distressed Employer)	ARPA and IIJA	Employers with a revenue decline of more than 90%	70% of qualified wages up to $10,000 per employee per quarter	Wages paid from October 1, 2021, to September 30, 2022

Number of Employees

The number and type of employees can affect the definition and calculation for qualified wages and health care costs. The size of an employer depends on its number of FTEs and the time period. This table summarizes thresholds and rules to determine the size of an employer for each period.

Time Period	Small Employer Threshold	Large Employer Threshold
2020	Less than or equal to 100 FTEs in 2019	More than 100 FTEs in 2019
Q1-Q2 2021	Less than or equal to 500 FTEs in 2019	More than 500 FTEs in 2019
Q3-Q4 2021	Less than or equal to 500 FTEs in any calendar quarter in either calendar year beginning after December 31, 2019, and ending before July 1, 2021. If an employer did not have in either calendar year beginning after December 31, 2019, and ending before July 1, 2021, the employer is treated as a small eligible employer if it had less than or equal to 500 FTEs in any calendar quarter beginning after June 30, 2021. For recovery startup businesses, the employer size is irrelevant. For severely financially distressed employers, the employer size is irrelevant if the employer had a revenue decline of more than 90%. Otherwise, the same rules as Q1-Q2 2021 apply.	More than 500 FTEs in any calendar quarter in either calendar year beginning after December 31, 2019, and ending before July 1, 2021. If an employer did not exist in either calendar year beginning after December 31, 2019, and ending before July 1, 2021, the employer is treated as a large eligible employer if it had more than 500 FTEs in any calendar quarter beginning after June 30, 2021.

To count FTEs for a given year or quarter, an employer must use the following steps:

Count the number of employees who worked at least 30 hours per week (or at least 130 hours per month) for each month in the year or quarter
Add up the total hours worked by all other employees (who are not counted as FTEs) for each month in the year or quarter
Divide the total hours by120and round down to the nearest whole number
Add the number of FTEs from Step One and Step Three for each month in the year or quarter
Calculate the average number of FTEs by adding up the monthly totals and dividing by 12 (for a year) or 3 (for a quarter)

Qualified Wages & Health Insurance Costs

Qualified wages refer to wages paid during a period when the business is suspended or revenues are declining. The list of qualified wages includes tips, bonuses, commissions, and severance payments, as well as sick leave, family leave, severance, and other compensation. Qualified wages include health insurance costs for eligible employees such as co-pays and deductibles.

The calculation and definition of health insurance and qualified wages are dependent on the size of the employer and the time period. The table below summarizes rules and examples in different scenarios. 2023 Employee Retention Tax Credit

Employer Size	Time Period	Qualified Wages and Health Insurance Costs	Example
Small	2020	All wages and health insurance costs paid to any employee, regardless of whether the employee worked or not	An employer with 80 FTEs in 2019 paid $8,000 in wages and $2,000 in health insurance costs to an employee in 2020. The employer had a revenue decline of more than 50% in Q2 2020. The qualified wages and health insurance costs for Q2 2020 are $10,000.
Small	Q1-Q3 2021	All wages and health insurance costs paid to any employee, regardless of whether the employee worked or not	An employer with 400 FTEs in 2019 paid $12,000 in wages and $3,000 in health insurance costs to an employee in Q1 2021. The employer had a revenue decline of more than 20% in Q1 2021. The qualified wages and health insurance costs for Q1 2021 are $15,000.
Small	Q3-Q4 2021 (Recovery Startup Business)	All wages and health insurance costs paid to any employee, regardless of whether the employee worked or not (subject to a $50,000 cap per quarter)	A recovery startup business that began operations in March 2020 paid $9,000 in wages and $1,000 in health insurance costs to an employee in Q3 2021. The business had average annual gross receipts of $800,000. The qualified wages and health insurance costs for Q3 2021 are $10,000.
Small	Q4 2021 – Q3 2022 (Severely Financially Distressed Employer)	All wages and health insurance costs paid to any employee, regardless of whether the employee worked or not	An employer with 600 FTEs in Q2 2019 paid $11,000 in wages and $4,000 in health insurance costs to an employee in Q4 2021. The employer had a revenue decline of more than 90% in Q4 2021. The qualified wages and health insurance costs for Q4 2021 are $15,000.
Large	2020	Wages and health insurance costs paid to an employee for the time that the employee did not work (up to the amount that the employee would have been paid for working an equivalent duration during the 30 days immediately preceding the period of economic hardship)	An employer with 120 FTEs in 2019 paid $10,000 in wages and $2,000 in health insurance costs to an employee who worked full-time (40 hours per week) in 2020. The employer had a business suspension due to a government order in April 2020. The employee did not work for two weeks in April 2020. The qualified wages and health insurance costs for April 2020 are $2,308 ($10,000 x2/52+$2,000 x2/52).
Large	Q1-Q3 2021	Wages and health insurance costs paid to an employee for the time that the employee did not work (up to the amount that the employee would have been paid for working an equivalent duration during the 90 days immediately preceding the period of economic hardship)	An employer with 550 FTEs in 2019 paid $15,000 in wages and $5,000 in health insurance costs to an employee who worked full-time (40 hours per week) in Q1 2021. The employer had a revenue decline of more than 20% in Q1 2021. The employee did not work for three weeks in Q1 2021. The qualified wages and health insurance costs for Q1 2021 are $5,769 ($15,000 x3/13+$5,000 x3/13).
Large	Q3-Q4 2021 (Severely Financially Distressed Employer)	All wages and health insurance costs paid to any employee, regardless of whether the employee worked or not (only if the employer had a revenue decline of more than 90%. Otherwise, the same rules as Q1-Q32021 apply.)	An employer with 700 FTEs in Q4 2019 paid $12,000 in wages and $6,000 in health insurance costs to an employee who worked full-time (40 hours per week) in Q4 2021. The employer had a revenue decline of more than 90% in Q4 2021. The qualified wages and health insurance costs

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Claim and Report Credit

To claim the Employee Retention Credit (ERC), an employer must file a federal employment tax return (Form 941) or an adjusted employment tax return (Form 941-X) with the Internal Revenue Service (IRS). The employer must report the qualified wages and health insurance costs paid to eligible employees and the amount of credit claimed for each quarter.

Form 941

Form 941 allows employers to declare their quarterly federal taxes, including income taxes, Medicare and Social Security tax. Form 941 allows employers to claim ERCs for current or future quarterly periods. Form 941 allows the employer to do:

ERCs can be used to reduce the amount of tax that an employer must pay to the IRS.
Request an advance payment of the ERC if the credit exceeds the taxes that the employer has to deposit 2023 Employee Retention Tax Credit
Any excess credit can be carried forward to the next quarter

To ensure the correct completion of Form 941, and to avoid common errors:

Use the latest version 941 which reflects updates and changes in the ERC.
Follow the IRS instructions and worksheets for calculating the ERC and reporting it.
Use Line 1c to report on the health insurance and wages that eligible employees have received.
Use Line 13d when reporting the credit for each quarter.
Line 13f is used to report any advance payment of credit received by the IRS
Use Line 24 to request an advance payment of the credit if needed
Line 25 is the place to enter any excess credit which can be carried to a subsequent quarter.
Sign and date Form 941, attaching any supporting documents, schedules, or schedules.

Tips and resources on how to complete Form 941 include:

Use online services (e-file or online filing) to submit Form 941, faster and with greater security.
The IRS website has updated FAQs on the ERC and Form 941.
For clarifications or help, you can contact the IRS.

Form 941-X

The Form 941 X is used for corrections and adjustments to a Form 941. Form 941-X allows employers to claim ERC retroactively. Form 941-X can be used by the employer to: 2023 Employee Retention Tax Credit

Claim refunds or credits for taxes overpaid due to the ERC
Report additional qualified wage and health insurance expenses paid to eligible employees which were not reported in Form 941
Correction of errors or omissions on Form 941 which affect credit amount claimed

To avoid making common errors and fill out the Form 941-X correctly, employers should:

Use the latest version 941-X to reflect the updated laws and regulations that impact the ERC.
Follow the instructions and worksheets provided by the IRS for calculating and reporting the ERC
Use Part 2 of Form 941 to indicate which lines are being amended or corrected.
Use Part 3 to explain the reason for a correction or adjustment on Form 941
Use Line 24 for any additional qualified wage and health insurance expenses paid to eligible workers
Use Line 25 to report any additional amount of credit claimed for each quarter
Use Line 26 when reporting any refund or credit that you have requested as a result of claiming your ERC
Sign the form 941-X, date it and include any documents or schedules that you wish to attach.

You can find some helpful tips on how to fill out the Form 941-X here:

Fill out a separate form 941-X per quarter being corrected or recalculated 2023 Employee Retention Tax Credit
After making a correction or finding an error, you should file Form 941X.
The IRS website has updated FAQs on the ERC, Form 941 X, and updates to the IRS website.
If you need clarification or assistance, contact the IRS or an accountant.

Deadline and Statute of Limitations

The last day to file Form 941 usually falls on the last month after the end of each quarterly period. For example, for Q1 2021 (January-March), Form 941 is due by April 30, 2021. If an employer has made all the required deposits for the quarter in a timely manner, they can file Forms 941 on the 10th of the second month. Following the end of the quarter. For example, the Q1 of 2021 is January-March. The Form 941 should be received by May 10th, 2021. 2023 Employee Retention Tax Credit

The deadline for submitting Form 941X depends on the time period. It is generally three or two years, depending on the date when the original Form 941 has been filed. For Q1 2020, (January-March), the Form 941 must be filed by April 30th 2020. If the employer has filed Forms 941 and paid tax by April 30th 2020, they have until April 30th 2023 to submit Form 941X. If an employer files Form 941 in April 2020 and pays the tax on June 15 2020, they have until June 15 2022 to file Form 941.

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Conclusion

The Employee Retention Credit (ERC) is a valuable tax benefit that can help employers who were affected by the COVID-19 pandemic keep their employees on the payroll and reduce the impact of the pandemic on their businesses or organizations.

The ERC can be claimed by filing Form 941 or Form 941-X with the IRS and reporting the qualified wages and costs of health insurance paid to eligible workers. The ERC is claimed by filing IRS Form 941 or 941-X and reporting qualified wages, health insurance costs, and the credit amount claimed for each quarter.

You should not miss the opportunity to benefit from this tax incentive if you are an eligible employer. The ERC is not available forever and has a deadline and a statute of limitations for claiming it. It is important to file your forms quickly and correctly. This article provides tips and resources that will help you avoid common errors. For clarifications or help, you can always contact an IRS agent or tax professional.

ERCs can be a huge help to your organization or business and its employees. It will help you to keep your employees, maintain a healthy cash flow, as well as recover from pandemic. This article should have helped you learn more about ERCs and how to apply for them. Thanks for reading and please stay safe.

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2023 Employee Retention Tax Credit

What is ERC and what does it do?

Employee Retention Credit (ERC) is a tax incentive for employers that retained their employees on their payrolls during the COVID-19 Pandemic.

The CARES Act was passed in March 2020. It was amended and extended in December 2020 by the CAA Act (Consolidated Appropriations Act) and in March 2021 by the ARPA Act (American Rescue Plan Act of 2021).

Who is eligible for the ERC?

The ERC is not available to everyone. Only employers who paid wages and retained employees between March 13, 2019, and December 31, 2020, are eligible.

Below are some details about eligibility.

A government order has suspended the business or organization (wholly or partially) due to COVID-19.
Their gross revenues for a quarter calendar in 2020 or in 2021 were lower than a percentage compared to their gross revenues for the same period in 2019.
It is a recovery-startup business that has been operating since after February 15, 2020. Their average annual gross receipts are no more than one million dollars.

How much is ERC?

The amount of ERC that a company will receive depends on a number of factors.

Some of these factors include the time period, the number of employees, the number of qualified wages, and health insurance costs paid to eligible employees. For a detailed explanation of ERC, you can read the article mentioned above.

How to claim the ERC?

To claim ERC benefits, an employer needs to file Form 941X or federal employment tax reform with the IRS.

The employer must report the qualified wages and health insurance costs paid to eligible employees and the amount of credit claimed for each quarter.

What is the deadline for submitting the ERC forms?

The deadline for filing the ERC forms is different for Form 941 and Form 941-X.

The deadline for Form 941 is usually the last day in the month after the end of every quarter. For Form 941X, the deadline is three years following the date on which the original form 941 was filed. It can also be from two years from the date that the tax was paid, with the later date being the more preferred one.